Corporate cash holdings are an important predictor of the cross–section of equity returns. An investment strategy that is long in stocks of firms with a high cash–to–assets ratio and short in stocks of firms with a low cash–to–assets ratio produces an average risk–adjusted excess return that varies from a minimum of 27 to a maximum of 93 basis points per month. A Cash factor (HCMLC) can explain such a difference in average returns. A model of the firm’s financing and investment decisions provides a structural interpretation of the reason why cash holdings carry a positive risk premium.

Using a unique database of daily transactions from Australian equity managers, we investigate the relation between institutional trading and share returns. Our sample of institutional investors exhibit statistically and economically significant predictive power in forecasting future stock returns over the ten days following their trades. Detailed analysis indicates that manager style is important in understanding the link between institutional trading and stock returns. We find growth-oriented managers are momentum traders, while style neutral and value managers are contrarian. Further, the contemporaneous relation between institutional trading and returns depends on relative trade size, broker use, and investment style – there is a negative contemporaneous relation between trades and returns for value / contrarian managers and a positive contemporaneous relation between trades and returns for style neutral and growth managers. The manner in which brokerage is employed by the fund manager can provide insights on the motivation for the trade. JEL classification: G23

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National Taiwan University This paper provides a risk-based explanation for the leverage anomalies. Following Daniel and Titman’s (1997) methodology, we show that the characteristic-based explanations for the book-leverage and the market-leverage anomalies are both rejected by Ferguson and Shockley’s (2003) leverage-based three-factor model, which receives stronger support for the period before 1980. With independent samples from six other non-U.S. G7 countries, we obtain robust results which support the superiority of Ferguson and Shockley’s (2003) three-factor model in explaining the leverage anomalies. Further evidence shows that leverage premia are reduced, or even eliminated after returns are adjusted by Ferguson and Shockley’s factors. JEL Classification: G10; G12; G32.